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"Healthcare" is a very broad umbrella term for many, many subsectors, and the strategy private equity firms employ in their investment varies broadly by sector.
Pharma, biopharma, and biotech companies tend to be the focus of venture or growth capital investors, and in this case the investor is usually just backing an innovative idea and providing growth liquidity to the founders.
Healthcare IT, similarly, draws a lot of early stage investor attention for the same reason, but you also see some buyouts for the more established firms- Athenahealth will be an interesting case study here: its unique value proposition drew backing by venture and growth investors, and now it has reached a market penetration and a scale where it is seeking an buyer to bring some traditional business sense (focusing on maximizing sales strategies, strategic acquisitions, bringing in seasoned leadership, controlling costs, etc) to a high growth company, which could be either a PE firm or a strategic buyer.
Where I suspect your original comment was targeted, healthcare services, is to me the most interesting aspect of healthcare because its the one we all interact with- hospitals, physician groups, urgent care centers, etc. The PE firms that invest in these spaces and actually do it well (which are now the ONLY firms that invest here- its impossible to win here unless you know exactly how to do it) usually don't "raise price". Instead they aggregate supply by rolling up individual practices in a fragmented market, create a brand and roll out a marketing strategy (healthcare is now consumer retail, lets be real), standardize operations and leverage a centralized "back office" to drive efficiencies on each marginal acquisition, and bring in professional leadership to an industry that in the last 30 years hasn't had a change in leadership and has resisted technology and modernization. You can' t raise price on the people who pay for healthcare out of their pocket, they either don't have the money or they'll go elsewhere. And its tough tough tough to raise the prices insurance companies will pay as they have all consolidated and have all the negotiating leverage (unless we're talking about a healthcare services provider with extreme scale-HCA).
That got much longer than I meant it to! TL;DR: My experience in this space is PE firms are doing much more good than harm for prices, quality, and access to care in the healthcare space.
@mm103" You're spot on with regards to healthcare services. Much of the issue in that space really comes down to increasing operational efficiencies. Almost every aspect of the revenue generation for service providers is governed by CMS, which in turn governs how insurance and reimbursement rates are set by everyone. Cash-only clients aside, as that's a supply and demand situation, Since all of the prices are set in advance, HC Services are limited in the revenue they can earn. And even then, leverage only goes so far to increase the non-medicare/non-medicaid reimbursement rate. Those rates are set in stone. Anyone that takes medicare or medicaid will not get a cent above what is on the fee schedule. For insurance, providers will get a higher reimbursement rate if they have the size and scope to do more procedures while being able to bill in network. However, unless you have a massive footprint, that's extremely hard to do.
It's funny you brought up HCA, as negotiating can only go so far. HCA's size advantage doesn't add much bottom line comparatively. While they can get a better reimbursement rate, it's not about higher rates, it's about a higher volume. If a 1 Level ACDF creates $75,000 in total billing and gets reimbursed on average at $50,00, HCA's size advantage may turn that 50K to 55K in reimbursement. They won't get close to a 100% reimbursement rate for the facility. Yes, the 5K in reimbursements matters, as volume is a huge factor - Getting 5K more per surgery in reimbursements over 200 surgeries is $1MM in bottom line revenue. Across their 297 facilities where you can reasonably assume that an ACDF can be performed, that means an added $297MM to the bottom line. Where HCA has its advantage is that it can leverage multiple insurers better than a smaller group. For a smaller group, it may not make sense to be in-network with all insurers in a given area. For a a hospital system, the cost-benefit tips in favor of being in-network once you hit HCA's size.
While that higher reimbursement rate is nice, what makes HCA so strong isn't being the better negotiator, but the economies of scale created by being able to get better reimbursement rates, regardless of the size, with multiple insurers across its geographic scope. IF you have 50 facilities in Texas, being in network with all of the carriers who cover Texas means a higher overall reimbursement (before negotiating) than being selective. Medical reimbursements is a volume game, and that's the big driver of revenue. Remember, insurance companies have access to the same information that HCA does, so both are on an equal footing. HCA getting a 10K increase on reimbursement for an ACDF is nice, but if they only do a high volume of ACDFs a year. That's peanuts versus taking a $100 increase on a procedure that they see 10,000 of in a year. Having more insurers giving you smaller increases ends up producing more value for HCA than going for the big home runs.
Frieds , you're preaching to the choir! I live in specifically this space and agree completely, and as an aside its fantastic to find someone else on here with a shared perspective- I don't see many healthcare services conversations on WSO. For that reason, and because the original question was quite broadly drawn, I abstracted my response to the highest level I could while still trying to be helpful.
You're of course right to highlight that it's a volume game. Of the 2 topline inputs, price and volume, you can only meaningfully move the needle on volume for the reasons you explained so well. I'd also highlight a detail that is implicit in your analysis, and that is when a health services provider is considering driving a hard bargain with insurance companies on price/reimbursement rate, they risk reducing their steerage. Payors can (and do) get quite creative when it comes to encouraging and incentivizing their members to go to other providers even while keeping you in their network.
Where I think it can get really interesting going forward is with some of the specialized providers who operate in niches where demand for their services drastically outweighs supply. Hospital operators spend all day, every day trying to drive volume to their facilities (hence the huge investments in outpatient points of care), but there are other providers- residential substance abuse, eating disorder clinics, etc- with incredibly long waitlists and a dearth of qualified and reputable providers. I find these really interesting types of spaces to think about, where the investment thesis can be about scalable investment and responsible growth.
I look forward to seeing you around the forums and hopefully having some more healthcare-specific topics!
I've been around WSO for years (and holy shit, I'm almost an 11 year vet of the boards!), so I"ve definitely be around the block. I think the reason most people don't discuss HC Services, besides being, and it really is, a niche area, it's one that requires an understanding of the space and no amount of M&A deals can replace spending time dealing directly with HC Services. I grew up in the business before even starting college, so I've seen first hand all this shit. I honestly think most people don't get the scope of HC Services from a PE Standpoint. The only value in buying out service providers is to bolt-on into a larger organization and achieve volume, or buyout a practice, increase efficiencies, and then either form a a "super-practice" if you will or lever it into a regional coverage practice for a facilities provider. And that's not including the Medspa space, which still amuses me that there are buyouts of Medspas.... then again, it's a cash-only business, so that does make it worthwhile.
To your point, I don't think that there is an implicit argument to be made about service providers driving a hard bargain with insurance companies on price/reimbursement rate to reduce steerage. From my own experience, people are stupid and will follow the recommendation of their physician if seen on a referral basis or have to deal with the follow-up position due to continuing care rules from an emergency room visit. For the former, most physicians refer to other physicians they trust and know personally, not necessarily people on the "in-network" list. From a Payor standpoint, there is nothing that can be done to specifically send a patient to an in-network provider. While they can create incentives all they want, it doesn't always happen that way. From an emergency room standpoint, once EMTALA comes into play, the provider has a duty of care that has to be met regardless of the Payor's in-network status. If there is an actual physician-patient relationship, regardless of whether or not the obligations under EMTALA are fulfilled, the provider is required to treat the patient. While I can argue that this is done to protect the provider from being sued for malpractice or abandonment, it ultimately comes down to the duty of care. This is crucial because no amount of poking and prodding by a Payor can stand in the way of the duty of care a provider is obliged to provide provided a physician-patient relationship exists until such discharge or termination occurs. If the Payor says that a patient cannot see a provider while still treating, that may open up a can of worms that Payors will not want to go down. That said, I do generally agree that the Payor will incentivize the use of in-network providers where possible. This is why I mentioned the focus of HCA's leverage being their ability to negotiate with multiple insurance companies better than a service provider could. By being in-network, HCA doesn't need to avoid the steerage issue as they can direct patients to whichever facilities are in-network for a given insurer.
As far as the supply/demand issue, I think part of it is the dearth of quality providers and part of it is the lack of funding due to ridiculous rules and legislation. In NJ, for example, to get admitted to a substance abuse facility, I've heard stories that you need to claim addictions for multiple substances (ex. Heroin and Alcohol) to get on a list, and even then, insurance will not necessarily cover enough time for a stay to be effective. That is something that blows my mind. An addict wont' be able to do well after treatment with only 10 days of in-patient treatment covered and the remaining 20 days coming out of pocket. I also think the lack of federal funding for these programs makes service providers wary about opening up facilities as well. At the same time, with the way the opiate crisis is going, I think that more money will be directed to help service providers open up niche centers to cover treatment. The problem is that once you get into such specialized treatment, I don't know how scalable the model really is due to the added labor component.
At some point in the next day or so I'll PM you. I'd like to take the conversation off line and chat.
I don't think you'll be remiss to see a physician in a PE backed company. Physicians are there to treat patients - that will never change. When it comes to the actual treatment, there is little that a PE company can do. PE-backed ventures can require physicians to refer internally where feasible to increase volume, however they can't necessarily force an increase in the volume of patients a physician sees. For example, there's a medical practice in NJ with 762 Physicians across 80+ specialties (some are overlapping such as the Neuro who does Neuro, Neurospine and Spine), of which 672 are accepting new patients. Part of their mandate is that physicians refer internally where they can. I mean, if a patient comes in with a glioblastoma or a schwanoma, they can refer internally while a patient with oligodendroglioma may need to be referred out because of how uncommon they are.
Outside of generalists who rely on a high volume patients (think pediatricians, internists, etc.) who act as general physicians, specialists and surgeons are traditionally seen on a referral basis. So these guys aren't your first stop for the most part. And when they are the first stop, depending on the specialty, they don't begin direct treatment directly. In orthopedics, for example, an orthopedist won't treat a joint until other therapies (ex. Physical Therapy) have been tried and were proven to not work. So specialists don't have the high churn you're thinking of. However, specialists are the ones that drive surgical volume for a hospital. At the same time, PE backers cannot tell physicians to perform unnecessary (as in ones without any reasonable medical basis for) surgeries, which means that they can't draw volume. Plus, there are protections in place in the insurance approval process that would prevent that from happening. If a physician wants to do a surgery, it can take time to get it approved. I've seen surgeries take 2 weeks to get approved for medical necessity on a non-emergent basis and I've seen it take months. I have stories where a surgical request was made (within 7 days of seeing the patient), denied by an insurance company (within 14 days of getting the request), appealed by the physician (within 14 days of the appeal), and then after speaking with the physician (another 14 days), the insurance company would delay the decision pending an IME (Independent Medical Evaluation) which can take a few weeks to get done, followed by another appeal against the IME. All this is done to make sure the surgery is necessary - that's a pretty serious amount of work to get a surgery approved.
TL;DR - don't worry about the churn and burn. PE can't directly interfere in the provision of care by a service provider.
HC Services does have some “bad business”. Beyond unnecessary services, out of network rates are pretty common, even for large chains / outsourcers (e.g. ED physicians by Envision / TeamHealth if you google). There are also reimbursement support stuff (like in dialysis). Most of the lab stuff has some kind of reimbursement issue if you dig deep enough. Historically, lot of these companies were smaller and fragmented, and the bad practices didn’t come to light. As they get rolled up and become larger under PE ownerships, it’s a bit more visible. And tbh the space is mostly PE owner (not enough public names), so could say it’s mostly HC issue in general, but becoming PE issue given their ownership and more performance based models.
Another effect of PE or large ownership is the referral game within their chains. Even for Medicaid / CHIP patients, it can be fairly profitable to bring in patients for a low margin business and then refer them to something high margin (eg eye glasses) and that was not possible before PEs started connecting dots on some of the distant providers.
Whether it’s volume / utilization increase or out of network / shady billing - these will continue driving healthcare cost higher.